Ben Ryatt, professor of languages at a southern university, owns a small office

Question

Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to the university campus. He acquired the property 12 years ago at a total cost of $630,000—$58,000 for the land and $572,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, so Professor Ryatt is unsure whether he should keep it or sell it. His alternatives are:

Keep the property. Professor Ryatt’s accountant has kept careful records of the income realized from the property over the past 7 years. These records indicate the following annual revenues and expenses:

Professor Ryatt makes a $12,800 mortgage payment each year on the property. The mortgage will be paid off in 7 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $9,300 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 14 years. He also feels sure that 14 years from now the land will be worth 1.82 times what he paid for it.

Sell the property. A realty company has offered to purchase the property by paying $230,000 immediately and $21,000 per year for the next 14 years. Control of the property would go to the realty company immediately. To sell the property, Professor Ryatt would need to pay the mortgage off, which could be done by making a lump-sum payment of $78,000. Professor Ryatt requires a 11% rate of return. (Ignore income taxes.)

You must use spreadsheet functions or a financial calculator to solve these questions.

Calculate the net present value of cash flows using total cost approach if he keeps the property.(Negative amount should be indicated by a minus sign. Round final answer to the nearest whole dollar.)

Calculate the net present value of cash flows using total cost approach if he sells the property.(Negative amount should be indicated by a minus sign. Round final answer to the nearest whole dollar.)

Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to the university campus. He acquired the property 12 years ago at a total cost of $630,000—$58,000 for the land and $572,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, so Professor Ryatt is unsure whether he should keep it or sell it. His alternatives are:

Explanation / Answer

a.) If he keeps the property

Annual cash flow 55,700 (37,400 + 18,300) for 14 yrs
PV Ann of 55,700, N 14, R 11% = 388,890

Annual mortgage pymt 128,00 for 7 yrs
PV Annuity of 12800, N 7, R 11% = -60316

Sell Land & Building in 14 yrs for 114,860 (9,300 + 58000x1.82)
PV, N 14, R 11% = 26,648

NPV = 388,890 - 60,316 + 26,648 = $355,222

b.) If he Sells the property
Sell today for 230,000 less 78,000 = 152,000
PV Annuity 21000, N 14, R 11% = 146,620

NPV = $298,620

c.) Keep the Property

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.